A holistic approach

Insurers are now looking at risk and risk management in more detail

There are many new insurance entrants into the commercial segment of the market. Though the market is stagnant with few new business start-ups and some businesses forced to close their doors, there are more insurers catering to the market.

Aon SA chief broking officer Lee Stacey says: “As a consequence, prices are being cut to the bone as players seek to attract clients. We have to be more efficient in the ways we do business, and that is where some of the new entrants have an advantage with new IT platforms and processes and no legacy challenges. This market segment (SME) is very complex with many different factors that have to be taken into account, and automatically rating clients has been difficult due to the diversity of industry sectors.

“The challenge is accurately and efficiently pricing the risk. Some of the new entrants are technology driven and they are working to automatically rate clients and some appear to be doing it well.”

She says the corporate market is still soft, with prices too low compared with the risks covered. As a result, brokers are seeking avenues through which they can add value instead of just competing on price.

“We are trying to be clever in terms of programme design and the manner in which we structure the deductibles and whether we can get more limit instead of only reducing premiums. However, as long as there is excess capacity in the market, prices will remain a factor.

“Many of our customers are under severe financial pressure. We are seeing it day in and day out with some customers struggling to align their insurance premiums with their profits for the year,” Stacey says.

She says this means companies are focused on prioritising their cover and examining the covers they are buying and examining why they are buying the cover.

Historically, people have bought higher limits because it was cheap and in some cases bought additional cover for the same reason. Stacey says in the process of examining their companies’ insurance portfolios there are a few areas where they are not trimming.

“Everyone is too focused on directors and officers (D&O) cover and it is an area where they will not skimp, but in all the other classes they are looking to make savings,” Stacey says.

There are also issues about cover not being taken where there may be a higher level of risk.

For example, there is a lot of attention being given to cyber risks and a decision not to buy cyber cover may raise issues as to whether it is a rational decision.

“Every day we have discussions with customers about rationalising their cover as they seek to reduce their costs,” Stacey says.

She says a lot of people who are buying cyber cover are doing so to acquire the ancillary services that are built around it. In other words, they are buying for the crisis management team.

“In many cases it is not about the cover but rather the hands-on protection and assistance,” Stacey says.

Though companies focus on cutting costs, there are risks associated with doing so. In addition to the potential losses associated with an event, there are risks that directors may find themselves in the spotlight over why they did not cover particular risks.

“If the decision to lower or cut cover is made as a result of a rational process — namely the company buys less cover because of the cost versus the expected losses — and that the company has documented that this was a considered decision, it is unlikely that directors would be penalised.

“However, if it was not done as a result of a carefully considered process, perhaps the company simply forgot to buy the cover, then directors could find themselves in trouble,” Stacey says.

Insurers are taking an increasingly holistic approach and they are looking at risk and risk management in more detail. This approach is particularly understandable in an environment in which risks are not priced according to fundamentals but rather the result of competitive pressures.

In the corporate world insurance buying decisions are not just purchasing decisions, they are risk decisions and in time insur-

‘‘ PRICES ARE BEING CUT TO THE BONE AS PLAYERS SEEK TO ATTRACT CLIENTS. WE HAVE TO BE MORE EFFICIENT IN THE WAYS WE DO BUSINESS LEE STACEY